Circular 7/2016 of the Bank of Spain on Accounting Specifics for Banking Foundations and Amendments to Circulars 4/2004 and 1/2013

OFFICIAL STATE GAZETTE No. 292 Saturday, December 3, 2016 Sec. I. Page 84850 I. GENERAL PROVISIONS BANK OF SPAIN 11483 Circular 7/2016, of November 29, of the Bank of Spain, which develops the accounting specifics that banking foundations must apply, and which amends Circular 4/2004, of December 22, to credit institutions, on rules for public and reserved financial information and models of financial statements, and Circular 1/2013, of May 24, on the Risk Information Central.

Law 26/2013, of December 27, on savings banks and banking foundations (hereinafter, Law 26/2013, of December 27), introduced a significant change in the legal framework for savings banks in our country, requiring those that exceeded certain limits, fixed in terms of their territorial scope of activity or business volume, to transform into banking foundations and lose their status as credit institutions. One of the fundamental objectives of the aforementioned law is that these banking foundations focus their attention on the development of their social work.

Likewise, the aforementioned law has established special obligations for those banking foundations that exceed certain limits of participation in the capital of credit institutions. In this way, if such participation reaches 30%, banking foundations must submit to the Bank of Spain, for approval, a management protocol for their financial participation and an annual financial plan. In the event that participation reaches 50% or another percentage lower than that which allows them control, these foundations have the duty to reinforce the financial plan, incorporating an investment diversification plan, and to constitute a reserve fund to meet possible needs for own resources of the participated credit institution.

Royal Decree 877/2015, of October 2, developing Law 26/2013, of December 27, and Bank of Spain Circular 6/2015, of November 17, come to regulate, respectively, the aforementioned reserve fund and the obligations of banking foundations arising from their participations in credit institutions.

Additionally, Law 26/2013, of December 27, establishes the functions attributed to the Bank of Spain regarding banking foundations within the framework of its competencies as the authority responsible for the supervision of the participated credit institution. The Bank of Spain must control that banking foundations comply with the rules contained in the aforementioned law derived from their participation in the credit institution and, in particular, must assess the influence of the banking foundation on the sound and prudent management of said entity.

Banking foundations are obliged to keep an orderly accounting, in accordance with what is stipulated in Law 50/2002, on foundations. On the other hand, Order ECC/2575/2015, of November 30, which determines the content, structure, and publication requirements of the annual corporate governance report, and establishes the accounting obligations of banking foundations, empowers the Bank of Spain to develop the rules and models of financial information for these foundations. In this sense, given the special nature of this type of entity, of a foundational character, but also with relevant financial activity, this circular adapts the accounting regulations applicable due to this foundational character to the particularities derived from the obligations entailed by their participation in credit institutions.

In particular, the accounting regime that banking foundations will apply in their individual and consolidated annual accounts is specified, the need to identify in internal accounting the composition and realization of the reserve fund that certain banking foundations must constitute is determined, and additional information to be included in the notes is developed. cve: BOE-A-2016-11483 Verifiable at http://www.boe.es

OFFICIAL STATE GAZETTE No. 292 Saturday, December 3, 2016 Sec. I. Page 84851 Likewise, modifications are introduced in Circular 4/2004, of December 22, to credit institutions, on rules for public and reserved financial information and models of financial statements, to clarify and update the content of some rules and statements, in line with the latest modifications in definitions and formats for the preparation of supervised financial information statements in the European Union (known as «FINREP»), as well as to simplify the information obligations of credit institutions.

Finally, Circular 1/2013, of May 24, on the Risk Information Central, is modified to update the regulations applicable to the situation of risk holders, improve information on the situation of restructured and refinanced operations, and clarify the concepts of guarantors and insurers and sureties, as well as the treatment of the right to collect regulated tariffs.

Consequently, in exercise of the powers conferred, the Governing Council of the Bank of Spain, upon proposal of the Executive Commission, has approved this circular, which contains the following rules: INDEX Rule 1. Object. Rule 2. General regime of the individual annual accounts of banking foundations. Rule 3. General regime of the consolidated annual accounts of banking foundations. Rule 4. Identification in internal accounting of the composition and realization of the reserve fund. Rule 5. Content of the notes. Rule 6. Submission to the Bank of Spain of reserved individual statements. Rule 7. Submission to the Bank of Spain of public annual accounts. First Final Provision. Modification of Circular 4/2004. Second Final Provision. Modification of Circular 1/2013. Third Final Provision. Entry into force. Normative references used in this circular: Law 50/2002: Law 50/2002, of December 26, on foundations. Law 26/2013: Law 26/2013, of December 27, on savings banks and banking foundations. Royal Decree 1514/2007: Royal Decree 1514/2007, of November 16, approving the General Accounting Plan. Royal Decree 1159/2010: Royal Decree 1159/2010, of September 17, approving the rules for the formulation of consolidated annual accounts and modifying the General Accounting Plan approved by Royal Decree 1514/2007, of November 16, and the General Accounting Plan for Small and Medium-sized Enterprises. Royal Decree 1491/2011: Royal Decree 1491/2011, of October 24, approving the rules for adapting the General Accounting Plan to non-profit entities and the model of the action plan for non-profit entities. Royal Decree 877/2015: Royal Decree 877/2015, of October 2, developing Law 26/2013, of December 27, regulating the reserve fund that certain banking foundations must constitute; modifying Royal Decree 1517/2011, of October 31, approving the regulation developing the consolidated text of the Law on Audit of Accounts, approved by Royal Decree 1/2011, of July 1; and modifying Royal Decree 1082/2012, of July 13, approving the development regulation of Law 35/2003, of November 4, on Collective Investment Institutions. Circular 4/2004: Circular of the Bank of Spain 4/2004, of December 22, to credit institutions, on rules for public and reserved financial information and models of financial statements. cve: BOE-A-2016-11483 Verifiable at http://www.boe.es

OFFICIAL STATE GAZETTE No. 292 Saturday, December 3, 2016 Sec. I. Page 84852 Circular 1/2013: Circular of the Bank of Spain 1/2013, of May 24, on the Risk Information Central. Circular 6/2015: Circular of the Bank of Spain 6/2015, of November 17, to savings banks and banking foundations, on certain aspects of remuneration and corporate governance reports of savings banks that do not issue securities admitted to trading on official securities markets and on the obligations of banking foundations arising from their participations in credit institutions. Rule 1. Object. This circular aims to regulate the regime of the annual accounts, individual and consolidated, of banking foundations regulated in Law 26/2013, as well as that of the reserved statements that must be submitted to the Bank of Spain. Rule 2. General regime of the individual annual accounts of banking foundations.

1. In the formulation of their individual annual accounts, banking foundations will apply what is provided in Royal Decree 1491/2011, with the particularities contemplated in this circular.
2. Suppletorily, in everything not specifically regulated by Royal Decree 1491/2011 and by this circular, the General Accounting Plan will apply in the terms provided in Royal Decree 1514/2007, as well as sectoral adaptations and resolutions of the Accounting and Audit Institute approved under the final provisions first and third, respectively, of the aforementioned royal decree.
3. The structure of the individual annual accounts of banking foundations (including the formats of the balance sheet, income statement, and notes) must be adapted to the normal model regulated in Royal Decree 1491/2011. To formulate their individual annual accounts, banking foundations cannot use the abbreviated and simplified models regulated in the aforementioned royal decree. Rule 3. General regime of the consolidated annual accounts of banking foundations.
4. Banking foundations with participations in commercial companies, including credit institutions, in which they maintain a position of control in the terms provided in article 42 of the Commercial Code, must formulate consolidated annual accounts in accordance with what is provided in said code and in Royal Decree 1159/2010, with the particularities provided in this circular. For the purposes of preparing the consolidated annual accounts of banking foundations, regarding the elements of assets, liabilities, income, and expenses and other items of the accounts of the participated credit institution, prior valuation homogenization before incorporation into the foundation's annual accounts will not proceed.
5. Notwithstanding the above, in the event that, as of the closing date of the fiscal year, any of the group companies had issued securities admitted to trading on a regulated market of any Member State of the European Union, international financial reporting standards adopted by European Union regulations will apply for the formulation of consolidated annual accounts.
6. In any case, the structure of the consolidated annual accounts of banking foundations (balance sheet, income statement, statement of comprehensive income, statement of total changes in equity, statement of cash flows, and notes) must be adapted to the content and formats established in chapter four, on «Content of financial statements», of Circular 4/2004. cve: BOE-A-2016-11483 Verifiable at http://www.boe.es

OFFICIAL STATE GAZETTE No. 292 Saturday, December 3, 2016 Sec. I. Page 84853 Rule 4. Identification in internal accounting of the composition and realization of the reserve fund. Banking foundations that, in accordance with Royal Decree 877/2015, must constitute a reserve fund will have to identify in their internal accounting: i) the detail of the items of own funds that compose the constituted reserve fund, and ii) the detail of the items that record the assets in which said fund is realized, in accordance with what is provided in Circular 6/2015. The aforementioned assets will be registered accounting-wise in the balance sheet items that correspond to them by nature. Rule 5. Content of the notes.

1. In the notes of the individual and consolidated annual accounts, banking foundations, in addition to the information they must detail in accordance with what is provided in rules 2 and 3, must include the following points, to the extent that they are applicable to them in accordance with Law 26/2013: a) With regard to the management protocol that banking foundations referred to in article 43 of Law 26/2013 are obliged to prepare, it must be reported whether it has been approved by the Bank of Spain and, if so, the date of said approval. Likewise, an explicit reference to the section of the foundation's website where said protocol is published will be included. Additionally, it must be reported in the notes the essential elements of the content of the management protocol, such as: i) the strategic criteria for the management of the participation in the credit institution; ii) the relationships between the foundation's board of trustees and the governing bodies of the participated credit institution, and iii) the criteria governing operations between the foundation and the participated credit institution, as well as the mechanisms provided to avoid possible conflicts of interest. b) With regard to the financial plan that banking foundations referred to in article 44 of Law 26/2013 are obliged to prepare, it must be reported in the notes whether it has been approved by the Bank of Spain and, if so, the date of said approval. Likewise, foundations must indicate in the notes whether they are obliged to submit to the Bank of Spain a reinforced financial plan, in accordance with the provisions contained in Law 26/2013.
2. In the case of foundations acting in concert, in accordance with article 43.2 of Law 26/2013, the information on the management protocol and financial plan prepared jointly in accordance with what is established in the sixteenth rule of Circular 6/2015 must appear in the notes of each of them, in accordance with what is established in the previous paragraphs.
3. Banking foundations will include in the notes the information relating to section 13.2, «Application of patrimonial elements to own purposes», of the model of the notes established by Royal Decree 1491/2011, which includes both information on the goods and rights that form part of the foundational endowment or social fund, and those directly linked to the fulfillment of own purposes, as well as information on the destination of rents and income. However, with regard to the latter, they will not include the model appearing in said section on «the degree of fulfillment of the destination of rents and income», given the particularity established for banking foundations in the additional provision third of Law 26/2013. cve: BOE-A-2016-11483 Verifiable at http://www.boe.es

OFFICIAL STATE GAZETTE No. 292 Saturday, December 3, 2016 Sec. I. Page 84854 Rule 6. Submission to the Bank of Spain of reserved individual statements.

1. Banking foundations referred to in article 44 of Law 26/2013 obliged to present a reinforced financial plan must submit to the Bank of Spain the following reserved individual statements, in accordance with the formats included in annex 1: Statement Name Frequency FB.1 Reserved individual balance sheet. Annual. FB.2 Reserved individual income statement. Annual. FB.3 Breakdown of investment in financial assets by counterparty. Annual. FB.4 Breakdown of investment in financial assets by NACE codes. Annual. The remaining banking foundations must submit to the Bank of Spain exclusively the individual statements FB.1 and FB.2. The aforementioned statements must be submitted no later than March 31 of each year and must refer to December 31 of the previous fiscal year.
2. The presentation of the reserved individual statements to the Bank of Spain must be made by electronic transmission, in accordance with the technical specifications communicated for this purpose. Regardless of the responsibility of the banking foundation and the members of the board of trustees, the reserved individual statements must be electronically signed by the president or, whenever the board of trustees has expressly designated them as responsible for these purposes, by the general manager, the secretary of the board of trustees, or both.
3. The Bank of Spain may develop technical applications and correlations that will be published on its website, to facilitate the preparation of the reserved individual statements. Rule 7. Submission to the Bank of Spain of public annual accounts. All banking foundations will send to the Bank of Spain the individual annual accounts and, if applicable, the consolidated annual accounts, with the corresponding audit reports, within 10 business days following their approval by the board of trustees. First Final Provision. Modification of Circular 4/2004. The following modifications are introduced in Circular 4/2004, of December 22, to credit institutions, on rules for public and reserved financial information and models of financial statements:
4. In rule four, section 4 is replaced by the following text: «4. The dissemination of the primary individual financial statements referred to in section 1 will be carried out by the Spanish Banking Association, the Spanish Confederation of Savings Banks, or the National Union of Credit Cooperatives, clearly and prominently indicating that the published statements have been formulated applying the public financial information rules of this circular.»
5. In rule five, section 2 is replaced by the following text: «2. The dissemination of the primary consolidated financial statements referred to in section 1 will be carried out by the Spanish Banking Association, the Spanish Confederation of Savings Banks, or the National Union of Credit Cooperatives, clearly and prominently indicating that the published statements have been formulated applying the public financial information rules of this circular.» cve: BOE-A-2016-11483 Verifiable at http://www.boe.es

OFFICIAL STATE GAZETTE No. 292 Saturday, December 3, 2016 Sec. I. Page 84855 3. In rule sixty-four, on «Recognition, valuation, and presentation criteria», the following modifications are made: a) Letter j) of section 15 is replaced by the following text: «j) “Maximum recoverable amount”: the lower amount between the “Recoverable amount” of effective real guarantees, calculated in accordance with what is provided in annex IX, and the gross book value of financial assets or the nominal value after applying conversion factors for off-balance sheet exposures. This calculation will be performed operation by operation.» b) In section 15, four new letters are inserted: k), l), m), and n), with the following text: «k) “Excess of gross exposure over the maximum recoverable amount of effective real guarantees”: the amount of the positive difference between the gross book value of financial assets and the maximum recoverable amount of effective real guarantees. This calculation will be performed operation by operation. When operations do not have effective real guarantees, this amount will coincide with that of the gross exposure. l) “Excess of exposure after applying conversion factors over the maximum recoverable amount of effective real guarantees”: the amount of the positive difference between the nominal value after applying conversion factors for off-balance sheet exposures and the maximum recoverable amount of effective real guarantees. This calculation will be performed operation by operation. When operations do not have effective real guarantees, this amount will coincide with the nominal value after applying conversion factors. m) “Excess of gross exposure over the maximum recoverable amount of effective real guarantees and risk-free personal guarantees”: the amount of the positive difference between the gross book value of financial assets and the sum of the maximum recoverable amount of effective real guarantees and the amount of risk-free personal guarantees. This calculation will be performed operation by operation. When operations do not have effective real guarantees nor risk-free personal guarantees, this amount will coincide with that of the gross exposure; and, when the maximum recoverable amount of effective real guarantees plus the amount of risk-free personal guarantees is greater than the amount of the gross exposure, it will be zero. n) “Excess of exposure after applying conversion factors over the maximum recoverable amount of effective real guarantees and risk-free personal guarantees”: the amount of the positive difference between the nominal value after applying conversion factors for off-balance sheet exposures and the sum of the maximum recoverable amount of effective real guarantees and the amount of risk-free personal guarantees. This calculation will be performed operation by operation. When operations do not have effective real guarantees nor risk-free personal guarantees, this amount will coincide with the nominal value after applying conversion factors; and, when the maximum recoverable amount of effective real guarantees plus the amount of risk-free personal guarantees is greater than the nominal value after applying conversion factors, it will be zero.» 4. In rule sixty-seven, on «Reserved individual statements», in the list of statements in section 1, statement FI 101 is renamed «Information on loans formalized, acquired, or classified in the month (business in Spain)». cve: BOE-A-2016-11483 Verifiable at http://www.boe.es

OFFICIAL STATE GAZETTE No. 292 Saturday, December 3, 2016 Sec. I. Page 84856 5. In rule seventy-one, on «Reserved statements relating to the statistical requirements of the Economic and Monetary Union», the clause (iv) of letter f) of section 2 is replaced by the following text: «(iv) Renewable loans and overdrafts: amounts disbursed in renewable loans, even if they are outside the time limits agreed in the contracts, understood as those loans other than those instrumented as credit cards that have the following characteristics: 1) the borrower can use or withdraw funds up to a previously approved credit limit without having to notify the lender in advance; 2) the amount of available credit can increase or decrease as borrowed funds are obtained and returned; 3) the credit can be used repeatedly, and 4) there is no obligation for periodic repayment of funds. Renewable loans include amounts disbursed through lines or credit accounts, even if they have a maturity established in the contract, that have not yet been repaid. This item also includes the amounts of excesses in loans r